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Friday, August 11, 2017

Markets Rebound from Three-Day Skid

Charles Schwab: On the Market

Posted: 8/11/2017 4:15 PM ET

Markets Rebound from Three-Day Skid

U.S. equities finished the week on a high note following a three-day
slide that has come courtesy of escalating tensions between North Korea
and the U.S. Treasury yields were mixed and the U.S. dollar was nearly
flat, as another lackluster inflation report appeared to have dampened
expectations of another Fed rate hike this year. Crude oil inched higher
gold extended a recent rally. Meanwhile, J.C. Penney and Snap posted
larger-than-expected losses and NVIDIA's quarterly results faced some
scrutiny.

The Dow Jones Industrial Average (DJIA) advanced 14 points (0.1%) to
21,858, the S&P 500 Index was 3 points (0.1%) higher at 2,441, and
the Nasdaq Composite rose 40 points (0.6%) to 6,257. In moderate volume,
790 million shares were traded on the NYSE and 1.8 billion shares
changed hands on the Nasdaq. WTI crude oil ticked $0.23 higher to $48.82
per barrel and wholesale gasoline was up $0.01 at $1.61 per gallon.
Elsewhere, the Bloomberg gold spot price gained $4.45 to $1,290.98 per
ounce, and the Dollar Index—a comparison of the U.S. dollar to six major
world currencies—was nearly unchanged at 93.06. Markets were lower for
the week, as the DJIA decreased 1.1%, the S&P 500 Index fell 1.4%
and the Nasdaq Composite was 1.5% lower.

J.C. Penney Co. Inc.
(JCP $4) reported a Q2 loss of $0.20 per share, or $0.09 ex-items,
versus the FactSet estimate of a $0.04 per share shortfall, as revenues
increased 1.5% year-over-year (y/y) to $3.0 billion, topping the
projected $2.8 billion. Q2 same-store sales declined 1.3% y/y, versus
the expected 1.2% decrease. JCP said it liquidated inventory in 127 off
its closing stores which had a negative impact on gross margin and
earnings-per-share (EPS). The company added that while broader retail
remains challenged, nearly all categories delivered improved sales
results, and it is encouraged by the improved performance in its total
apparel business. JCP reaffirmed its full-year guidance. Shares tumbled.

NVIDIA Corp.
(NVDA $155) posted Q2 EPS of $0.92, or $1.01 ex-items, versus the
projected $0.70, as revenues rose 56.0% y/y, or up 15.0%
quarter-over-quarter, to $2.2 billion, north of the expected $2.0
billion. The graphics chipmaker's gaming revenue topped expectations,
but its data center sales missed forecasts and its gross margin came in a
bit shy of estimates. NVDA issued Q3 revenue guidance with a midpoint
above forecasts. Shares fell as the Street scrutinized the data center
and margin results.

Snap Inc.
(SNAP $12) announced a Q2 loss of $0.36 per share, wider than the
forecasted $0.30 shortfall, as revenues rose 153.0% y/y to $182 million,
south of the estimated $186 million. The social media company's daily
active users missed expectations and shares saw heavy pressure.

Consumer price inflation misses forecasts

The Consumer Price Index (CPI) (chart)
ticked 0.1% higher month-over-month (m/m) in July, versus the Bloomberg
estimate calling for a 0.2% gain, while June's flat reading was
unrevised. The core rate, which strips out food and energy, also
nudged 0.1% to the upside m/m, compared to expectations of a 0.2%
increase and matching June's unrevised rise. Y/Y, prices were 1.7%
higher for the headline rate, below forecasts of a 1.8% rise, while the
core rate was up 1.7%, in line with projections. June y/y figures showed
an unrevised 1.6% rise and an unadjusted 1.7% increase for the headline
and core rates respectively.

Prices for shelter, medical care, recreation and apparel all rose,
slightly more than offsetting declines for autos, communication and
household furnishing. The core rate remained below the Fed's 2.0% target
for the third-straight month, causing uncertainty regarding if the
Central Bank has one more rate hike in it this year as it also aims to
start to shrink its behemoth $4.5 trillion balance sheet.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her article, Fed Keeps it on the QT,
the period of weak inflation continues, which Fed chair Janet Yellen
has suggested is somewhat due to temporary factors. However, to date,
the Fed has raised rates four times; yet over that same period,
financial conditions have actually loosened. This is why the Fed feels
it can continue to tighten policy in the face of lower inflation. Liz
Ann adds that the Fed has signaled that September is likely the start
point to balance sheet shrinkage, but eyes will be on the Jackson Hole
annual conference and a potential debt ceiling stand-off for
opportunities to further steer consensus around that timing. Read more
on the Markets & Economy page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.

Treasuries finished mixed, as the yield on the 2-year note declined 3
basis points (bps) to 1.29%, while the yield on the 10-year note dipped 1
bp to 2.19% and the 30-year bond rate ticked 1 bp higher to 2.79%.

Most European equities extended a weekly slide, with all major market
sectors seeing pressure. Global sentiment remained hampered by
escalating tensions between North Korea and the U.S., which continued to
foster risk aversion. The euro rose and British pound was little
changed versus the U.S. dollar, while bond yields in the region lost
ground. In economic news, inflation data out of Germany and France
matched expectation for July. Schwab's Chief Global Investment
Strategist Jeffrey Kleintop, CFA, points out in his article, What are fund flows telling us about trends and risks in the global stock market?,
that the money coming into ETFs is flowing into a broad range of stock
markets featuring a preference for international stocks and revealing a
surprising disconnect with the performance and geopolitical risk of the
underlying markets. Read more as well as his commentary, An important benefit to global investors is back after 20 years on the Markets & Economy page at www.schwab.com. Follow Jeff on Twitter: @jeffreykleintop. However, healthcare issues gained solid ground to help German markets stabilize.

Stocks in Asia fell broadly after yesterday's solid drops in the U.S.
and Europe as the global markets continue to rein in risk appetites amid
ramped-up tensions between the U.S. and North Korea as rhetoric from
both sides escalate. The Japanese yen rallied but markets in Japan were
closed for a holiday. Schwab's Jeffrey Kleintop, CFA, notes in his
article, Missiles and Markets: An investor guide to geopolitical risks
investors are best served when grim headlines are in the news by
remembering that geopolitical risks are a regular part of investing and
that a long history of geopolitical developments shows us that holding a
well-diversified portfolio may buffer the short-term market moves that
are most often the result. Investors should avoid overreacting to
geopolitical developments and stick to their long-term financial plans.
Read more on the International Investing page at www.schwab.com.

Stocks in South Korea fell sharply, as did those traded in mainland
China and Hong Kong, with the global uneasiness being met with reports
that Chinese regulators are investigating the nation's internet
companies for cyber-security violations. After the closing bell, Hong
Kong reported stronger-than-expected Q2 GDP growth. Australian
securities traded noticeably to the downside and India's markets were
lower. After the markets closed, India reported an unexpected dip in
industrial production for June.

Stocks Fall as volatility sparks up

U.S. stocks fell on the week as volatility showed signs of life on
ramped-up geopolitical concerns, with the U.S. and North Korea lobbing
threats and warnings at each other. The earnings and economic fronts
delivered mixed results to further dampen conviction. The Street cheered
Michael Kors Holdings Ltd's (KORS $45) and Ralph Lauren Corp's (RL $84) better-than-expected earnings despite declining sales but jeered similar results from Macy's Inc. (M $21) and Kohl's Corp. (KSS $39). Dow member Walt Disney Co.
(DIS $102) came under pressure after its topline and bottomline results
diverged and analysts' scrutinized its new streaming service deal and
plans. Of the 454 companies in the S&P 500 that have reported
earnings so far, about 68% have topped revenue forecasts and roughly 78%
have exceeded earnings projections, per data compiled by Bloomberg.

While inflation figures were cooler than expected, the Labor Department's Job Openings jumped to a record high and small business optimism
improved to the highest since February. The U.S. dollar, Treasury
yields and crude oil prices all finished lower on the week, along with
most major market sectors, though consumer staples issues eked out a
weekly advance.

Next week, the retail sector will remain in focus as Dow members Wal-Mart Stores Inc. (WMT $81) and Home Depot Inc. (HD $155), along with Target Corp. (TGT $56), will put the finishing touches on earnings season, while we will get the release of July retail sales. The housing market will also garner attention amid the releases of the NAHB Housing Market Index, as well as housing starts and building permits (economic calendar). Rounding out the busy week, the Fed will deliver its industrial production and capacity utilization report and the minutes from its July meeting, while we will get our first look at the consumer for August, in the form of the preliminary University of Michigan Consumer Sentiment Index.

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